How Long Can this Gold Rally Last?

While gold prices are poised to climb to a 29-month high there are growing reasons to be cautious

The Rio Olympics isn’t the only event that’s put gold on the map, but the reality is that the yellow metal might be in for a stall, or even a fall depending on global dynamics and Fed decisions.

In the meantime, the yellow metal continues to be hot, moving toward $1400 per ounce, a 29-month high, which begs the question: Is it almost time to sell?

Gold futures have been in an upswing all year and are now near $1350 per ounce. Year-to-date through August 12 the Barclay Financial and Metals Traders Index, comprised of commodity trading advisors’ managed futures programs, is up 3.2%, the best performer of any sub-index among the BarclayHedge CTA indexes.

The index is poised to set its best performance since at least 2010 when it gained 3.38% for the full year, but it’s not likely to beat the 10.35% gain in 2008.  There is currently $88 billion under management in the sub group of financial/metals traders, the highest level ever

Investors who want in with these traders need to open a managed account or invest in managed funds. Or, for an easier to flow into --  and out of – the gold market there are gold-related ETFs.

The PowerShares DB Gold Fund (DGL) is up more than 25% so far this year but the IShares MSCI Global Gold Miners ETF (RING) has soared 138% and the leveraged Direxion Daily Junior Gold Miners 3x Shares index (JNUG) has rocketed 889%. No surprise, those ETFs that are short gold are doing poorly, for now.

But what does the smart money think? The Commodity Futures Trading Commission’s Commitment of Traders Report shows that commercial traders and swap dealers are largely short gold and have added to their short positions the week of August 9. Producers and manufacturers were long 29,067 contracts but short 165,875, while swap dealers were long 32,598 contracts and short 208,731. Only managed futures funds were primarily long, with 281,496 long contracts compared to 36,244 short.

But George Gero, managing director at RBC Wealth Management and long-time COMEX gold trader, notes that open interest -- open contracts -- has dropped significantly since the end of June, from 622,000 to 575,883, down 7.4%. Funds are underinvested, says Gero, adding if the price of gold hits $1365, asset allocators and funds will be buying, pushing prices even higher.

He sees the yellow metal hitting $1400 per ounce by the end of year with no major down moves unless the Fed raises interest rates. But Gero warns about investing in gold mining ETFs because he says much of the gains are due to company cost savings as a result of cheaper crude prices.

Doug Eberhardt, author of Illusions of Wealth, blogger and broker of precious metals, also sees $1400 as key level. “My secret indicator is the phone ringing [at his office], and the last month has been nothing like May and June. Last week it picked up a little which means we could shoot up over $1400 with one last hurrah. The dollar is still key and both gold and silver have been almost perfectly inverse of the dollar lately.“

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